The FTSE 250 mid-cap index has risen by almost 40% over the last five years. For the FTSE 100, that figure is just 18%.
The mid-cap index has delivered a number of big winners for investors in recent years. Today I’m looking at two FTSE 250 stocks which I believe could beat the market over the next few years.
Growing order book
Ultra Electronics Holdings (LSE: ULE) specialises in electronic systems, primarily for the defence and aerospace markets. Much of its business comes from the US, where defence spending is said to be increasing. The group is also involved in providing security and cyber solutions for government customers, another rapidly growing market.
Figures published by the company today show that its order book has increased by 19% to £969.2m over the last 12 months. That’s a strong performance, in my view.
Stumbling block
The group’s first-half performance was solid if not spectacular. Exchange rates caused reported sales to fall by 4.2% to £350.5m. But excluding this, revenue rose by 1.3%.
The story of the company’s profits was a bit more complex. Underlying pre-tax profit fell by 16% to £43.6m. About 5% of this was due to exchange rates, but most of the remainder seems to have been caused by £6.1m of cost overruns. This problem was flagged up last year and is affecting a handful of contracts in the group’s Herley business, which makes ruggedized electronics for aviation use.
A turnaround buy?
The group generated an operating margin of 13.7% during the first half. Excluding the Herley problems, this figure would have been 15.4%.
Both of these are attractive figures, but I’m concerned that the company doesn’t seem to know when these profit-sapping cost overruns will come to an end.
Another potential concern is that the group is currently under investigation by the Serious Fraud Office, for suspected corruption in Algeria.
These risks shouldn’t be ignored, but earnings are expected to rise by 12% next year. Trading on 15 times earnings with a 3% yield, I suspect Ultra Electronics could be a decent turnaround buy.
This rival is growing fast
Turnaround situations always carry a certain risk. What if the problems aren’t fixed and get worse?
One company that’s already delivering powerful growth is engineering group Senior (LSE: SNR), which makes products for aerospace, defence and land transport customers. During the first half of this year, Senior’s pre-tax profit rose by 31% to £31.4m. The group’s earnings were 25% higher, at 5.9p, supporting a 7% increase in the interim dividend.
The company said that trading was “slightly ahead of expectations” but said full-year expectations were unchanged. However, like Ultra Electronics, Senior is benefiting from a growing order book.
The firm’s book-to-bill ratio was 1.2 during the half year. This means that new orders booked during the period were worth 20% more than existing orders completed during the half year. Profit margins are also expected to improve this year.
Reading the company’s commentary, I think there’s a good chance that full-year figures could be slightly better than expected. Although the shares aren’t cheap, on a 2018 forecast P/E of 19, earnings are expected to rise by 17% next year and the shares offer a well-supported dividend yield of 2.4%.
I think Senior could be worth a closer look at this level, given the group’s strong momentum.
